Risk Of A Diversified Portfolio

6553 Words27 Pages
Introduction:
Market risk, or beta risk, is described as a reflection of a project on stockholders’ risk of a diversified portfolio. Many factors can influence the market such as war, inflation, and recession. Market risk is measured by the firm’s beta coefficient to determine the effects the market has on the portfolio. In addition to market risk, there are two forms of risk that managers use to calculate the risk of a particular project related to holding a diversified portfolio. Stand-alone risk is used when the firm’s only holds one asset or a single stock. Corporate, or within-firm risk is the measurement of all assets or stocks held by the firm. Of these three risks, the Capital Asset Pricing Model states the market risk is the risk
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Stand-alone risk often correlated to the corporate risk which often correlates to the market; thus, if stand-alone risk is high, market risk will also be high. Market risk is the riskiness of a well-diversified project (assets or stocks) compared to the market using the markets beta, or slope of a linear regression. The projects is plotted against the market (beta) risk to determine its risk compared to the market. Much research has been done on the effects market risk has on stocks, firms, portfolios, exchange rates, and more. Research often concludes with supporting evidence that support the use of market risk for estimations and predictions in finance, since the market risk cannot be eliminated from the stock market.
Market Risk Management:
Understanding market risk is crucial in determining the factors that threaten one’s ability to attain returns from a particular project, single stock, or a portfolio. The impact of market risks is crucial to determining stability and the return on an investment. Many factors impact the market risk which effect both global and country economies. Market risk allows a firm to estimate the risk and return on projects or investments. Generally the riskier the project, the higher the returns. Market risk is predictable over time; although the predictions are not perfect, one can gain understanding into the effects the market will have on investment or how the investment will react to
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